Home Loans have again started to go up after an about year. Many of you either are waiting for your dream house or have made a plunge and acquired a house on loan. You should avail fixed or floating rate home loans? Answer has been always mysterious if you are not tracking the interest rate cycle.

Today lets discuss if you have made the right choice or if you are planning to take a home loan 

let’s see what you should choose – Fixed or Floating rate home loans?

Lending rates have fallen notably over the past one to two years before this small spike.

If you have been looking to buy a home with a loan component, it is without any doubt a good time to lock into attractive rates now. Property prices have corrected and sector is regularized through RERA. The discussion in hand is about Home Loan – fixed or floating rate home loans.

The phenomenon of lowering key policy rates since January 2015, by the RBI has come to a reversal.

In fact, given the recent favorable inflation, the possibility of a further rate hike by the US Fed, the rates may increase a bit in the coming year or two.

Hence, the important question is whether a home loan borrower should go for one of the cheapest rates under floating rate option. Or they lock into fixed rates as in coming year or two the rate may cross the fixed rate loan.

The Types – Fixed or Floating Rate home loans

Before we analyze the two options, let us understand how these work. Floating rate loans are essentially linked to a benchmark rate (MCLR), which moves up and down depending on the interest rate movement in the economy.

Hence,in line with the RBI’s rate cut from Jan 2015, bank lending rates too have fallen sharply by nearly 350 basis points (100 basis point equal to 1 percent) on new loans.

Under fixed rate loans, the interest charged to you is fixed at the time of availing the loan. This will not change until the contract contains certain conditions. If no such condition of review is present, the rate does not change in future.

These are 1-1.5% costly than floating rates when you are starting the loan.

There is also a third option. Here few banks and housing finance companies (HFCs) offer a fixed rate loan for certain period and then loan changes to floating. These are mostly found in campaigns or teaser rates. For eg SBI offered loan at 8.30% for one year then it will change to floating.

So which of these three options should you choose based on today’s scenario?

Floating Rates make more sense

Ideally,

• When interest rates are at a peak, rather than lock into fixed-rates for the long run, borrowers should prefer to go for floating-rate home loan. This will benefit when there is fall in lending rates.
• But when rates have bottomed out, borrowers may favor fixed-rate home loan to protect themselves from rate increases in the near future.
• When the rates have again started climbing up, as the case now, one can prefer a floating-rate option.

Reason for choosing Fixed or Floating Rate home loans

The choice is not simple to make. Floating rate loans are a better option in prevailing conditions, due to several reasons.

Home loan is a very long-term product & commitment. Interest rates tend to go up and down across cycles which are typically 4-5 years depending on economic parameters like inflation, credit growth & corporate growth.  If you get locked into purely fixed interest rate loans it could cost you dear, later on.

Eg: In 2012 and 2013, SBI was offering home loans at 11.5% interest rate under the fixed rate option. Same went to 8.6% this year.

So, borrowers who locked into fixed-rate loans than would have lost out on the sharp fall in lending rates in the last two to three years all the way down to 9%.

Fixed rate home loans, in 2013 ranged between 11 and 12%.

Meanwhile, under the dual rate system, since the interest rate is fixed for specified initial years, it can protect you from rate increases in the near future.

Final Thoughts

Fixed rate loans are costly at the start and above floating rate, as they charge for being predictable. Floating rates move with economy and experience cycles.

Hence, when the increase has started floating rate loans are a better option for home loan borrowers.

In floating rate one has to be vigilant as banks or loan companies offer you option of aligning your rate of interest to the rate it is giving a loan to new customers. This is a facility which can bring down your EMI & Tenure.

Hope you now have an idea what to choose between Fixed or Floating Rate Home Loans in the present ongoing scenario.

Share your views and also forward this article to friends who are looking to buy a home soon.